On November 11, 1961, Northeastern Corporation entered into a contract with the General State Authority

[ 416 Pa. Page 419]

for the construction of a state building. The contract called for a bond by Northeastern, conditioned upon the faithful performance of the contract and the payment of labor, material and equipment rental claims. On November 20, 1961, Northeastern also entered into a contract with the Secretary of Highways for the construction of certain state roads. This contract, too, called for a performance bond and an additional bond for the prompt payment of labor and material claims. Travelers Indemnity Company was surety on the bond for the building contract and Great American Insurance Company was surety on the bonds for the highway construction contract.

Northeastern defaulted in payment of certain labor and materialmen on each project and the sureties made payment in compliance with the bonds. On the petition of James C. Jacobs, a shareholder of Northeastern, that corporation was placed in receivership.

Final payment under both construction contracts is due and owing, but the amounts due on each are less than the amounts paid to labor and materialmen by the sureties. Each surety petitioned the court below for distribution to it of the moneys due on the respective contracts. Northeastern's receiver resisted the petitions and counterclaimed for the retained funds contending that the sureties are entitled to only their pro rata share as general creditors, not to the entire amounts as successors to the rights of the contractor.

The court below granted the petitions of the surety companies. This appeal followed from the dismissal of the exceptions filed by the receiver. After careful consideration, we are convinced that the court below correctly determined the issues.

I

The right of the sureties to the funds rests upon the application of the doctrine of equitable subrogation. It is clear that our rule has been that the right of a

[ 416 Pa. Page 420]

surety on a public construction bond to be subrogated to the right to the moneys withheld by the Commonwealth must be based on the existence of an obligation of the contractor contained in the construction contract to pay labor and materialmen. DuBois v. United States Fidelity & Guar. Co., 341 Pa. 85, 18 A.2d 802 (1941); Sundheim v. Philadelphia School Dist., 311 Pa. 90, 166 Atl. 365 (1933); City of Philadelphia v. Nat'l Surety Corp., 140 F. 2d 805 (3d Cir. 1944). The construction contracts in the instant case expressly contain that specific obligation.

A.

In part, the construction contract with the General State Authority explicitly recites: "Whereas, The Contractor has given his bonds to The Authority with sufficient surety in the sum determined upon by The Authority conditioned respectively for the faithful performance of the terms of this contract, the payment of claims for labor and material . . . ." Paragraph Nine of this contract reads: "The Contract Bond given by the Contractor conditioned upon the faithful performance of the Contract; the payment of labor, material and equipment rental claims . . . is attached hereto and made part hereof." Paragraph Thirteen adds: "Any person or corporation furnishing labor or material or actually renting . . . equipment to the Contractor or any Sub-contractor in connection with performance of this contract shall have a right of action to recover the cost thereof from the Contractor and the surety on the bond given to secure the payment for such labor, material or equipment rental as though such person or corporation had been named as obligee in such bond . . . ."

The pertinent provision of the bond referred to in the construction contract ...

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